Public Bill Committee

[Mr. Jim Hood in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003) - Schedule 16

Non-residents: investment managers

Amendment proposed [this day]: No. 78, in schedule 16, page 232, line 14, leave out paragraph 2.—[Mr. Hoban.]

Question again proposed, That the amendment be made.

Jimmy Hood: I remind the Committee that with this we are discussing the following amendments: No. 79, in schedule 16, page 232, line 28, leave out paragraph 3.
No. 80, in schedule 16, page 232, line 28, leave out paragraphs 3 to 6.

Mark Hoban: Let me summarise the position that we had reached on the amendments before lunch. As parliamentarians, we should be jealous of our rights to determine tax law. Parliament fought for those rights and we should not give them up lightly. I am not convinced that the Economic Secretary has fought as vigorously as she should have done to make sure that Parliament kept the rights that the amendment would enshrine in the Bill.
The Minister said three things that gave me some comfort, the first of which was that Her Majesty’s Revenue and Customs would consult the industry on how the regime would work.

Stephen Hesford: Climbdown.

Jimmy Hood: Order. The hon. Member for Wirral, West must not interrupt the hon. Gentleman when he is speaking.

Mark Hoban: The hon. Lady said that the consultation process included principles to enable clarity of how the regime would operate. The third thing that the Minister said was reassuring. She said that there would be transparency about the EU arrangements and that they would be posted on a website so that there was no doubt about what instruments were deemed investment transactions and what instruments were not. In that spirit of openness and consultation, I am minded to withdraw the amendment. However, if HMRC goes back to its previous habit of not consulting fully with the industry, the industry will put pressure on the Treasury to reinstate parliamentary scrutiny of the legislation. The amendments would be effective only if the open spirit of consultation that the Minister spoke about earlier continues. If it does, there will be no uncertainty. If it does not, there will be and we shall return to such issues when we discuss the Finance Bill further.

Kitty Ussher: I am bemused as to why the hon. Gentleman made it clear a few hours ago that he would press the amendment to a Division. I said that that meant he did not understand the financial services sector, and he has now decided not to call a Division. What happened in the intervening few hours?

Mark Hoban: The Minister should quit while she is ahead, rather than push her luck. I have reflected on what she said. Her argument improved somewhat, after a bit of pressure from the Tory Benches. Her exchanges towards the end of the debate on the amendments were much clearer than they were at the start. I do not want to draw out the proceedings for too much longer. Some safeguards that are in place should ensure that the provision works well and, if it is does not, I am sure that the industry will tell us. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 16 agreed to.

Clause 36 ordered to stand part of the Bill.

Clause 37

Individual investment plan regulations

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I cannot let the clause pass by without making some comments, which I know will be of particular interest to my hon. Friend the Member for Hammersmith and Fulham. The clause gives the Treasury the power to introduce by way of statutory instrument the reinstatement of tax advantages that would have been lost if holders of individual savings accounts in Northern Rock had taken out their money when the run on Northern Rock took place. Although it does not immediately leap out from the explanatory notes, it is clear from the regulations that the Minister kindly supplied last week that they relate to Northern Rock. Indeed, the press notice that was published last year made it clear that, after it was leaked that the Bank of England was acting as a lender of last resort to Northern Rock, a number of members of the public sought to withdraw their deposits from the bank because they felt that it was not a safe place to keep their cash. That triggered queues around the block, both literally and metaphorically, as many tried to withdraw their money over the internet.
Some of those customers held their money in cash ISAs. To lure back depositors and try to rebuild the retail deposit base of Northern Rock, the Minster announced that people who put their money back into the ISA with Northern Rock would have their tax relief reinstated. That also applied to people who redeposited their ISA money with other ISA providers, but as I understand it, the measure was particularly aimed at rebuilding the deposit base of Northern Rock. This debate is one of the rare occasions that we have for parliamentary scrutiny on what is happening with Northern Rock.

Greg Hands: Does my hon. Friend share my general concern that it does not matter what is asked about Northern Rock, because it is being held at arm’s length in a special purpose company, so that Ministers are unable to answer any questions. I hope that my hon. Friend has greater luck today.

Mark Hoban: My hon. Friend is right. We have both experienced the problems of trying to ask questions about Northern Rock, and we get poor answers in response, if we are answered at all. However, I might chance my arm and ask the Minister how much that change will cost the Government. What additional tax relief will be granted to customers who took their money out of their Northern Rock ISA and redeposited it with Northern Rock or another provider? Given that banks, as I understand it, must provide returns to the Treasury on ISAs and such things, I am sure that they have that information. Therefore, perhaps she could also tell us how much money has been redeposited in Northern Rock and, therefore, what the tax cost would be—[ Interruption. ] The Minister is looking quizzical. Can she tell us how much of the money that was originally taken out from cash ISAs in Northern Rock has been redeposited, and what the tax cost of doing so has been?

Kitty Ussher: I will answer the hon. Gentleman’s question, but I also want to make some remarks on the background, because he implied that the purpose of clause 37 was to help us rebuild Northern Rock’s retail base, which is not true at all. It was a logical point of fairness that I feel followed absolutely from the decision to guarantee normal retail depositors. The clause will allow retrospective ISA regulations to be laid, committing those individuals who withdrew cash from their Northern Rock ISA between 13 and 19 September 2007 to reinvest it in another ISA by 5 April 2008 and restoring the tax advantage that they would otherwise have lost. That is because in that window from 13 to 19 September inclusive, some ISA holders withdrew money from their ISA held with Northern Rock. By withdrawing their funds in cash, those individuals lost their ISA tax advantage for money deposited in 2007-08 and in earlier years.
Under existing ISA rules, if they had wanted to transfer their funds to a different ISA provider and retain their tax advantages, they should have arranged for Northern Rock to transfer their investment to another ISA provider. Before the Government gave that guarantee, I think that it was reasonable for them to presume that Northern Rock might be unable to transfer to another provider, so we are simply compensating for the actions taken at that time. We decided that the need to protect the financial interests of those ISA savers in exceptional circumstances justified a departure from the usual transfer rules. Therefore, on 18 October I announced that the funds that had been withdrawn between 13 and 19 September inclusive could be put back into any cash ISA with any provider by no later than 5 April this year and that the tax advantages would be restored. We announced that we would do so in this way. It was not an attempt to rebuild the retail base; it was a matter of fairness.
The hon. Gentleman asked about the cost to the Exchequer. There will be no tax cost at all, because we are simply restoring a tax advantage that customers already had. I do not have the figures for the overall amount of retail deposits currently in the bank. They will be made available through the business plan in the normal way.

Mark Hoban: I am sure that when the announcement on the matter was spun, back in October, it was not a benign gesture by the Government to encourage people to put their money back into other providers. It was pretty much aimed at encouraging people to put their money back into Northern Rock, since the retail deposit base was a key factor in its problems. It was a way of rebuilding the Rock.
I am grateful to the Minister for suggesting that information on the deposit base might be in the business plan. The only problem is that so far we have been denied sight of the business plan, so that was not a satisfactory answer. Also, I would have thought that there would be a tax cost if people were unable to redeposit money into ISAs. Under normal circumstances, there would have been a tax saving to the Government from the money coming out, because people could not reinvest it in ISAs.
The Minister’s answers were not particularly satisfactory, but we do not wish to deny tax relief to people who have already suffered uncertainty as a result of the problems of Northern Rock and how the lender of last resort was handled. I therefore do not propose to vote against clause stand part.

Question put and agreed to.

Clause 37 ordered to stand part of the Bill.

Clause 38

Tax treatment of participants in offshore funds

Mark Hoban: I beg to move amendment No. 81, in clause 38, page 18, line 33, at end insert
‘or otherwise altering or amending the definition of an interest in an offshore fund and the circumstances in which an investor is treated as disposing of an interest in an offshore fund’.
The amendment is relatively straightforward. Clause 38 is an enabling clause and will allow the Government, through statutory instruments, to establish the new offshore funds regime. I shall return to that on clause stand part. The process set out in subsections (4) and (5) requires that the first statutory instrument, creating the new regime, must be dealt with by the affirmative procedure. We welcome that level of parliamentary scrutiny. However, subsequent statutory instruments will be dealt with by the negative procedure. Having spent some time talking about the rights of Parliament, I shall not discuss the relative merits of the affirmative and negative procedures, but I do want to highlight an issue that one representative body has raised.
In the amendment, we accept that the negative procedure should be used for subsequent changes to the initiating instrument, if that is the right word, but we suggest that changes to the core definition of circumstances in which an investor will be taxed on offshore funds should be dealt with by the affirmative procedure. That definition is at the heart of the changes to the rules on offshore funds, and there should be proper legislative scrutiny of changes to it.
The draft instrument with which the Minister kindly provided the Committee contained significant parts about administrative arrangements, including on the provision of written information to Her Majesty’s Revenue and Customs, the inquiries that HMRC can make into a reporting fund and breaches of reporting fund requirements. Those are all important, but we accept that it might be appropriate for them to go through the negative procedure. However, we believe that a substantive change to the rules on offshore funds should go through the affirmative procedure. The amendment is intended to carve out that core definition and ensure that it continues to be dealt with through the affirmative process.

Kitty Ussher: The hon. Gentleman has explained the effect of the amendment, so I shall not repeat that. I do not feel that the amendment is necessary for two reasons. First, it is normal in tax legislation for regulation-making powers to be introduced. The first exercise of the power is made by affirmative resolution. That is what form a substantive debate on the new scheme would take. Subsequent exercises are made by negative resolution. That follows the same format as that for UK authorised investment funds introduced in 2005. It is simply standard procedure.
Concerns have been raised that we might use this power to change the tax definition of what constitutes an offshore fund. That is not the case. I reassure hon. Members that the Government have no intention of changing the tax definition of what constitutes an offshore fund by means of secondary legislation. Indeed, the Government decided not to change the definition this year, having listened to industry, and are committed to further discussions before changing the definition in next year’s Finance Bill. It will therefore be properly scrutinised at that stage. I ask the hon. Gentleman to withdraw the amendment because it is unnecessary.

Mark Hoban: I am grateful to the Economic Secretary for her reassurances about how the changes to the definition will be dealt with in next year’s Finance Bill, and that it is not the Government’s intention to change the rules about the characteristics without proper legislative scrutiny through primary legislation. In light of the assurances given, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sitting suspended.

On resuming—

Jimmy Hood: Thank you very much to those who helped Sam. He is fine now and he is on his way home. It was a bit of a scare, but thank you to everybody who acted as they did, and we wish him all the best.

Mark Hoban: We were debating whether clause 38 should stand part of the Bill. I have a series of questions to put to the Minister, which are based on representations made by a number of different bodies.
The first question is quite fundamental to the legislation. One of the concepts that underpins this framework is the distinction between income and capital, and the fact that they are taxed in different ways. There has been some comment that that distinction is in danger of outliving its usefulness, particularly in the convergence on accounting standards and the new and more complex products that will be included in offshore funds. It would be quite useful if the Minister would explain why the Treasury believes that this distinction is still appropriate. Furthermore, what implication does the Minister think would arise from the abolition of the distinction between capital and income?
Secondly, the new rules require an offshore fund to report 90 per cent. of its income. It has been suggested that the calculation may use the existing UK EP rules. However, there have also been suggestions that, given the fact that some of these funds are domiciled elsewhere, there are alternative accounting practices that could be used instead to reduce the cost of complying with these rules. I wonder if the Minister could explain the framework that she expects to be in place for the calculation of the income to be reported.
The approach that has been taken is that funds should seek advance certification to obtain reporting fund status. However, there is concern that the annual submissions required by HMRC will create uncertainty; I certainly hope not, and I hope that the fund continues to qualify. We might therefore introduce an element of retrospectivity into the way in which funds are granted reporting fund status. Has the Minister given any thought to how the issue might be addressed and whether there is a mechanism that could reduce the uncertainty?
My next point relates to the role of participants. In its submission, the Institute of Chartered Accountants notes that there is a contradiction between clauses 38 and 39. Clause 38 states that the new rules are about the tax treatment of participants in offshore funds, but clause 39 focuses on the treatment of the funds themselves. Under the new rules, only the fund itself can apply for reporting fund status. Under the existing rules for offshore funds, the participant can request that the Treasury treat the fund as a distributor fund so that it can keep the current favourable tax treatment. Has the Treasury given any thought to the participant being able to apply for the fund to have reporting fund status?
Clearly, offshore funds marketed in the UK will have an incentive to apply for reporting fund status, but other funds that people acquire will not have that status. A fund may derive no benefit from seeking reporting fund status if its main market is in the US, but an investor might want it to have that status because that might be advantageous in a tax sense. Non-UK nationals resident in the UK who hold funds that invest in their original jurisdiction might, for example, want to apply for reporting fund status. Similarly, an expat who has bought funds in the US and moved back to the UK might welcome the possibility of that fund having reporting fund status. If the fund itself did not apply for it, however, there would be no rules to enable the participant—the fundholder—to do so themselves. That option is available under the current rules, and I just wondered why it had not been carried forward into the new rules.

Kitty Ussher: Let me say just a couple of general words before addressing the specific points raised by the hon. Gentleman.
As we have discussed, the clause provides a regulation-making power to allow the tax regime for UK investors investing in offshore funds to be modernised and simplified. The offshore fund legislation seeks to prevent UK investors from gaining beneficial tax treatment by investing in offshore vehicles, where income flows could be converted into capital to gain tax advantages.
The marketplace for investment in offshore funds has changed significantly since the rules were originally introduced in 1984. The Government have worked to modernise the rules, while retaining the original objective. The modernised tax regime for offshore funds has been developed through extensive consultation with stakeholders. A paper with policy proposals was issued in October 2007. That was followed by summary of responses and further policy proposals in March. The draft regulations are in the public domain for consultation, and copies have been circulated to members of the Committee, as the hon. Gentleman was kind enough to mention. The final version will be published in the autumn, with a view to laying them before the House around the end of the year. As we have discussed, the regulations will be made under the affirmative procedure, so they will be subject to full scrutiny by the House.
The hon. Gentleman made several points. He asked why clause 39 allows for a retrospective effect, and she aid that that would perhaps lead to uncertainty in the industry. The clause permits a retrospective effect only in limited circumstances, and it will be used only if it becomes clear following further consultation on the regulations that the industry wants them, or parts of them, to take effect earlier than the date on which they are laid in the House of Commons. I want to make that clear to the Committee to remove any uncertainty.
The hon. Gentleman also asked whether moving to a new regime would lead to additional costs for funds, because systems will have to be updated and so on. The changes that we are making follow representations from the industry have been developed through consultation. That is a running theme in much of today’s debate. Broadly speaking, we may need to make adjustments to offshore fund systems to reflect the modernisation changes, but because we are working in tandem—shoulder to shoulder—with industry we envisage that the changes will lead to long-term benefits.
The hon. Gentleman also asked why an investor cannot apply for reporting fund status on behalf of an offshore fund. That issue will be considered as part of the consultation on the offshore funds tax regime. In March this year, we stated in our most recent publication on the subject that the Government will consider exploring the feasibility of responses on that issue in relation to investment by UK investors. HMRC receives approximately six applications a year from UK investors who wish to treat their offshore fund investment as if it were a distributor status offshore fund. We will consider the evidence on whether to replicate similar rules in the modernised offshore funds tax regime.
The hon. Gentleman asked about the framework for the calculation of the income to be reported. Again, in the document “Offshore Funds: the Next Steps” that we published in March, we set out our thoughts on that and on how the computation of income should operate. The process will be based on acceptable accounting standards and information, as set out in the regulations that are subject to consultation. He also asked why the figures are 90 per cent. in relation to reporting. In principle, it was agreed that 100 per cent. was appropriate, and the reduction to 90 per cent. was to deal with cases where the amount could not be easily estimated—it is a practical, administrative issue. I hope that I have answered the questions he has asked. If I have not responded to all the hon. Gentleman’s points, I am happy to do so in correspondence.

Question put and agreed to.

Clauses 38 ordered to stand part of the Bill.

Clause 39 ordered to stand part of the Bill.

Clause 40 ordered to stand part of the Bill.

Schedule 17

Insurance companies etc

Mark Hoban: I beg to move amendment No. 92, in schedule 17, page 242, line 3, leave out sub-paragraphs (5) and (6).
Paragraph (5) of schedule 17 deals with the tax treatment of fronting reinsurance commitments, and seeks to tackle a situation in which a life company obtains tax relief for the costs of acquiring business—for example, the commission it pays to the person who refers the business to them—that is reimbursed by the insurer either wholly or partly for all of those costs. All the risk transfers from the life company to the reinsurer. In this case, the life company claims tax relief for the expenses incurred regarding how much is actually reimbursed by the insurer. The paragraph deals with a particular aspect of fronting. As part of a package, a retailer may sell a term assurance, which would be placed with a life company that is then reinsured with a captive insurer who is part of the same group as the retailer. The retailer will receive commission from the life assurer who will be reimbursed for that by the reinsurer. The life assurer will receive tax relief on the cost of acquiring the business, but, under the new rules, will not be able to do so where the retailer who receives the commission and the reinsurer who pays life assurance commission are part of the same group. The measure will tackle a practice that has emerged.
The Association of British Insurers raised concerns about the provision, but it has—in my interpretation, with a sense of reluctance—accepted paragraph (5). We are concerned about the retrospective nature that arises in sub-paragraphs (5) and (6). Why is there a retrospective element? I understand that acquisition expenses for life policies are, for taxes purposes, spread forward over seven years, so expenses incurred in 2002 will obtain tax relief between 2002 and 2008. However, the changes under paragraph (5) do not apply just to expenses incurred after the date of the pre-Budget report, when the announcement was made, but to all unrelieved expenses. Costs incurred under existing tax law between 2002 and 2007, on which businesses would have expected relief and which they would have factored into their calculations and pricings in respect of the work that they are doing for the retailer, will now have to be written off, because they will not obtain any tax relief for them. The insurers object to that element of retrospectivity. Again, it goes back to a point that I have made in previous sittings. The measure undermines the certainty of the tax system, because at that point the insurers knew what the law was and acted in accordance with it.
It is worth bearing in mind the fact that the principles on retrospectivity—the Rees rules—were debated in the Standing Committee on the Finance Bill 30 years ago. Peter Rees, then an Opposition Treasury spokesman and later a distinguished Chief Secretary to the Treasury—now a Member of the other place—set out some parameters on retrospective legislation, and how it could be used to tackle tax avoidance. He argued that legislation could be backdated to the point at which a clear warning was given through either a parliamentary question or a statement. The point was that, having flagged up that change in the law, it could be enacted in the subsequent Finance Bill. That principle has since been observed and followed by Governments of both persuasions.
The Rees principle ensures, in effect, in this country businesses are taxed on the basis of what the law says. However, in respect of the provision, the ABI has a point, because it is logical to say that expenses incurred after the PBR should not get tax relief. Life companies expected that they were going to be relieved in respect of expenses that have been incurred, but which have yet to be relieved; that was the basis on which they incurred those expenses and on which they expected to get tax relief. Paragraph (5) is retrospective in its application, but it goes beyond what is acceptable under the Rees principles, because it means that people will not receive tax relief on legitimately incurred expenses, even though they were to be taxed in accordance with the law at the time they were incurred. That is why I tabled amendment No. 92. Although the amendment may be slightly technically deficient, I am sure that if the Minister is swayed by the power of my arguments she will come up with a more technically compliant amendment on Report. Nevertheless, it is important that the Committee discuss this matter.

Kitty Ussher: If I were swayed by the power of the hon. Gentleman’s arguments, I would overlook the fact that his amendment should also remove sub-paragraph (7) technically to have the effect that I presume was intended. Of course, we could produce Government amendments to correct that, but unfortunately I am not swayed by the power of his arguments. I shall explain why.
For the Committee’s benefit, since the hon. Gentleman has explained the purpose of paragraph (5) of schedule 17, I will not rehearse that argument, but will just address the points that he made. I am glad that the hon. Gentleman mentioned the Conservative Treasury Minister, Peter Rees, who introduced the Rees rule. I was wondering whether he had purloined my briefing pack at some point over lunch, because I was intending to use the Rees rules to make exactly the opposite point. Peter Rees, who is now in the other place, set out that the fact that if legislation is announced before a Budget, it should be sufficiently detailed so that people know where they stand. We believe we have done that through the pre-Budget report, so the issue of retrospectivity—if that is the word; it might be retrospectiveness—is not one that we will take from the hon. Member for Fareham.
That, however, is beside the point. The substantive point that I want to make concerns the hon. Gentleman’s complaint that the expenditure on commissions disallowed for tax purposes in 2008 may have been spent up to six years ago when the company expected to get relief—I think that we all know which company we are talking about—and that that expectation should be honoured. There are a number of responses to be made, but the main point is that there has been no real outlay of funds by the fronting company to justify a tax relief. The fronting company is not at risk in any real sense, and its only interest in the arrangements is a modest fee. The other economic flows arising from the arrangement net out to zero, so the tax relief on the commissions is, therefore, a straightforward tax subsidy that should not be allowed.
We do not accept that the company is entitled to relief in the first place. If necessary, we may litigate on the issue if it comes to that. Courts are not always well disposed to tax schemes that manufacture tax deductions, when there is no corresponding economic cost. Finally, simply incurring expenditure on an asset does not guarantee that the tax treatment of the asset, whether on realisation or amortisation of the expenditure, cannot be changed in future without being characterised as retrospective. That is what invariably happens in relation to capital gains tax, and it is what happened with relief being denied not from 9 October—the PBR date—but from a later date that is not before 1 January 2008. Therefore, we believe that the commencement rules in paragraph (5) are fair and necessary to stop an unacceptable leakage of tax.
I have another point on which I would like to tease the hon. Gentleman. If his amendment were hypothetically passed, it would deprive the Exchequer of £35 million in the first full year, which I will now add in to our black hole calculations. [Laughter.] For that reason alone, I ask the hon. Gentleman to withdraw his amendment.

Mark Hoban: I did not expect to provoke such hilarity on our side. I am surprised at the Minister. After last week’s announcement of a £2.7 billion reduction in tax allowances, which will be funded from borrowing, she is not in a position to talk about anyone’s black holes. I thought that she might have held back from making that sort of comment in the light of her Department’s predicament.
I do not want the Minister to think that we condone the scheme. From my perspective, I can see where the problems arise. If I thought that the scheme was acceptable, I would have tabled a very different amendment, which would delete paragraph (5) entirely. I think that the Minister has drawn the wrong lesson from the Rees rules, which talk about outlawing a process, or a tax avoidance scheme, from the day that the rules are announced. What we have is a situation in which the expenses incurred are based on the tax law at the time. I would expect the Rees rules to apply to expenses incurred from the date of the PBR to the date of Royal Assent. I do not think that the rules should necessarily apply to expenses incurred before that period. The Minister’s brief on the Rees rules is very different from my reading of them, so I cannot have purloined that document over the lunch break. As we spent some of the lunch break together, it would have been difficult for me to find out about it. I do not agree with the Minister’s interpretation of the Rees rules. [Interruption.] The Minister and I had a very enjoyable time at the financial services lawyers’ AGM. I do not think that the Minister’s interpretation of the Rees rules is correct, but I do not particularly want to press the amendment to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Kitty Ussher: I beg to move amendment No. 105, in schedule 17, page 242, line 28, at end insert—
‘(2A) In paragraph (f) of that subsection, after “Scheme” insert “, or from another insurance company,”.’.
Most miscellaneous receipts arising from an insurance company’s life assurance business are taxable, but if a life insurance company receives an amount under the financial services compensation scheme to meet liabilities to policyholders—for example, to meet the costs of endowment mis-selling—that recovery is not taxed. That is because, quite rightly, the insurance company gets no tax relief for the mis-selling costs. However, if the life insurance company receives a claim under its professional indemnity policy to meet the same sort of expenses, that recovery would be taxed as a result of changes made by schedule 17. As there is no policy reason to make that distinction, we are simply removing it. I hope that that is clear.

Mark Hoban: I am grateful to the Minister and her officials for providing a link between the explanatory notes and the amendments. That has been very helpful. Paragraph 5 of the explanatory notes states that the relief is available in relation to recoveries from other insurance companies, but only where they go to meet the cost of fulfilling obligations to policyholders. Can the Minister clarify what is meant by the statement—I shall repeat it—that the relief is available in relation to recoveries from another insurance company, but only where they go to meet the cost of fulfilling obligations to policyholders? I shall give an example of a case in which there might be ambiguity, and I would welcome clarification from her.
Before entering the House, I worked for a firm of chartered accountants and one exercise in which I was involved was the compensating of customers who had been mis-sold policies. When customers were compensated, one element of the cost was the compensation itself, but clearly as a professional firm we charged the costs of that exercise to the business. Does the definition of costs that the Government expect to be relieved include any additional costs incurred by the business—for example, by employing professional firms to help it to calculate what the loss might be, to verify the process and so on—as well as the compensation itself?

Kitty Ussher: My understanding is that the answer to that question is yes, in so far as the costs meet the real cost of fulfilling the obligation to policyholders, they are covered.

Amendment agreed to.

Kitty Ussher: I beg to move amendment No. 106, in schedule 17, page 245, line 6, leave out sub-paragraph (4) and insert—
‘(4) Omit paragraph 42 (and the heading before it).’.
This is simply a consequential change relating to amendment No. 107.

Amendment agreed to.

Mark Hoban: I beg to move amendment No. 91, in schedule 17, page 247, line 1, leave out from beginning to end of line 43 on page 248.

Jimmy Hood: With this it will be convenient to take Government amendments Nos. 107, 109 and 116.

Mark Hoban: Amendment No. 91 was tabled following the expression of concerns by representative bodies. They could not understand why the Government had sought to legislate on the apportionment of income and gains, as that was subject to a consultation between the insurance industry and the Treasury which was not expected to conclude until 2009. The changes set out in paragraph 1 were not discussed with those bodies. They were concerned that the consultation process, which had hitherto run reasonably well, seemed to have petered out when the changes were proposed. Amendment No. 91 would revert to the current basis of apportionment.
I look forward to hearing the Minister’s explanation of the Government amendments in the group. We must be serious about consultation; the situation shows what happens when it goes wrong. I am sure that when the Chancellor goes round to see the Association of British Insurers tomorrow, its representatives will make that point to him. Recent reforms of life insurance taxation have worked smoothly only when they have involved consultation with the industry rather than change announced unexpectedly.

Kitty Ussher: I shall deal with that point immediately. A draft of paragraph 17 of the schedule was sent to the industry working group last summer. We received a nil response, so we presumed that it was okay. Perhaps we should have dragged the group into a room and beat it out of them, but in the interests of good industry relations, we decided not to pursue that path. When they saw the Bill, they said, “Whoops, perhaps there are some issues we want to talk about.” They then engaged, and we proposed the Government amendments. In the meantime, I presume that the Opposition tabled amendment No. 91 as a probing amendment, perhaps as a result of the same lobbying exercise. At all times, we have sought to engage constructively.
As the question asked by the hon. Member for Fareham seemed to relate to the process rather than the actual amendments, I will leave it there, unless he would like me to explain the amendments. [Interruption.] I think that the hon. Gentleman wants me to explain them. After consulting with the industry, we tabled Government amendments Nos. 107, 109 and 116 as part of the ongoing process of simplifying the life insurance corporation tax code. Paragraph 17 of the schedule introduces provisions to clarify the scope and operation of the rules for dividing the income, gains and losses of a life insurance company among the different categories of life insurance business.
As I said, like most of schedule 17, the provisions were sent some time ago to the working groups involved in the major and complex consultation exercise on life insurance taxation. After the publication of the Finance Bill, the groups made a number of helpful suggestions about how the provisions could be improved. That is why Government amendment No. 107 will replace much of paragraph 17 with a revised and improved version. It will also introduce a new paragraph 17A, which continues the simplification process. Amendments Nos. 109 and 116 make minor consequential repeals of obsolete legislation.
Paragraph 17 and the Government amendments will simplify and modernise the rules for dividing the income and gains of a life insurance company among the different types of businesses. The changes will not affect how the division is made, which will be the subject of ongoing discussions with the insurance industry working group on apportionment. Perhaps that answers the hon. Gentleman’s questions.

Mark Hoban: I am grateful for the Minister’s explanation, but when does she expect the consultation on apportionment to be completed?

Kitty Ussher: I will be able to answer that question shortly. The results of the consultation and the report on its conclusions will be in the 2009 Finance Bill.

Mark Hoban: I am grateful. I would say to the Minister only that it is always foolish to assume that a nil reply means assent on difficult technical issues. I look forward with eager anticipation to discussing apportionment in next year’s Finance Bill. I am afraid that we seem to debate life assurance in every year’s Finance Bill; I hope that the end of the consultation process will mean that we will no longer be required to do so. However, given the Minister’s assurances and the fact that the ABI has indicated that it is pleased that the Government have seen sense, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 107, in schedule 17, page 247, line 17, leave out from beginning to end of line 43 on page 248 and insert ‘carried on by the company,
(c) income chargeable under Case V of Schedule D in respect of any overseas property business treated as carried on by the company under section 432AA,
(d) other income of the company chargeable under Case V of Schedule D,
(e) distributions received by the company from companies resident in the United Kingdom,
(f) credits in respect of any creditor relationships (within the meaning of Chapter 2 of Part 4 of the Finance Act 1996) of the company,
(g) credits in respect of any derivative contracts (within the meaning of Schedule 26 to the Finance Act 2002) of the company,
(h) any income of the company chargeable under Case III of Schedule D in respect of annuities and other annual payments within paragraph (b) of Case III of Schedule D as substituted by section 18(3A),
(i) any credits brought into account by the company under Part 3 of Schedule 29 to the Finance Act 2002 (intangible fixed assets), and
(j) any income of the company chargeable under Case VI of Schedule D, other than profits of the company chargeable under section 436A (gross roll-up business).
(1ZB) In subsection (1)(a) above “losses” means—
(a) losses in respect of any separate Schedule A businesses treated as carried on by the company under section 432AA,
(b) losses in respect of any overseas property businesses treated as carried on by the company under that section,
(c) debits in respect of any creditor relationships (within the meaning of Chapter 2 of Part 4 of the Finance Act 1996) of the company,
(d) debits in respect of any derivative contracts (within the meaning of Schedule 26 to the Finance Act 2002) of the company,
(e) any debits brought into account by the company under Part 2 of Schedule 29 to the Finance Act 2002 (intangible fixed assets), and
(f) any losses of the company computed in the same way as profits chargeable under Case VI of Schedule D, other than any losses of gross roll-up business.
(1ZC) For determining as mentioned in subsection (1) above what parts of income or gains arising from the assets of the company’s long-term insurance fund are referable to PHI business (to the extent that it would not be the case by virtue of subsections (1ZA) and (1ZB))—
(a) “income” also includes profits shown in the technical account, and
(b) “losses” also includes losses so shown.”
(4) In subsection (1A), for “, all of the income and gains or losses referred to in subsection (1) above is” substitute—
(a) all of the income and losses referred to in paragraph (a) of subsection (1) above, and
(b) all of the gains and losses referred to in paragraph (b) of that subsection,
are”.
(5) In subsection (3), after “Income” insert “or losses”.
(6) After that subsection insert—
“(3A) Amounts falling within—
(a) section 442A,
(b) section 85(2C) of the Finance Act 1989, or
(c) section 85A of that Act,
are directly referable to basic life assurance and general annuity business.”
(7) In subsection (4A), after “Income” insert “or losses”.
(8) In subsection (5), for “income, gains or losses” substitute “income and losses referred to in paragraph (a) of subsection (1) above, and any gains and losses referred to in paragraph (b) of that subsection,”.
(9) In subsection (7)—
(a) in paragraph (a), for “income, gains or losses” substitute “income and losses referred to in paragraph (a) of subsection (1) above, and gains and losses referred to in paragraph (b) of that subsection,” and insert at the end “and”,
(b) in paragraph (b), for “arising from the assets is, and gains or losses accruing on the disposal of the assets are,” substitute “and losses arising from the assets, and gains and losses accruing on the disposal of the assets, are”, and
(c) omit paragraph (c) and the “and” before it.
(10) In consequence of the preceding provisions, omit the provisions specified in sub-paragraph (11).
(11) The provisions mentioned in sub-paragraph (10) are—
(a) section 432AB(2) of ICTA,
(b) section 502H of that Act,
(c) paragraph 3 of Schedule 11 to FA 1996,
(d) paragraph 19(4) of Schedule 12 to FA 1997,
(e) paragraphs 36(1) and (3) and 138(2) and (3) of Schedule 29 to FA 2002,
(f) paragraph 19(4) of Schedule 9 to F(No.2)A 2005, and
(g) paragraphs 13(2) and 44 of Schedule 7, and paragraph 5 of Schedule 8, to FA 2007.
(12) The amendments made by this paragraph have effect in relation to accounting periods beginning on or after 1 January 2008.

“BLAGAB profits” etc
17A (1) In section 431 of ICTA (interpretative provisions relating to insurance companies), after subsection (2YA) insert—
“(2YB) “BLAGAB profits”, in relation to an accounting period of an insurance company, means the company’s BLAGAB income and gains for the period reduced (but not below nil) by the company’s BLAGAB deductions for the period.
(2YC) “BLAGAB income and gains”, in relation to an accounting period of an insurance company, means the aggregate of—
(a) income chargeable for the period under Schedule A or Case III, V or VI of Schedule D so far as referable (in accordance with section 432A) to the company’s basic life assurance and general annuity business,
(b) distributions received in the period from companies resident in the United Kingdom so far as so referable, and
(c) chargeable gains so far as so referable accruing to the company in the period, but (subject to section 210A of the 1992 Act) after deducting—
(i) any allowable losses so referable and so accruing, and
(ii) so far as they have not been allowed as a deduction from chargeable gains in any previous accounting period, any allowable losses so referable previously accruing to the company.
(2YD) “BLAGAB deductions”, in relation to an accounting period of an insurance company, means the aggregate of—
(a) amounts falling in respect of any non-trading deficits on the company’s loan relationships to be brought into account in the period in accordance with paragraph 4 of Schedule 11 to the Finance Act 1996, and
(b) the expenses deduction given by Step 8 in section 76(7) for the period.”
(2) In section 755A(11C) of that Act (treatment of chargeable profits and creditable tax apportioned to company carrying on life assurance business), omit paragraph (b) and the “and” before it.
(3) In section 85A of FA 1989 (excess adjusted Case I profits), for subsections (6) and (7) substitute—
“(6) “The relevant income” means—
(a) the company’s BLAGAB income and gains for the accounting period (but excluding any amount within this section), and
(b) profits of the company chargeable under Case VI of Schedule D under section 436A of the Taxes Act 1988 (gross roll-up business) for the accounting period.”
(4) In section 88 of that Act (meaning of “policy holders’ share of profits”), for subsections (3) to (3B) substitute—
“(3) For the purposes of subsection (1) above the relevant profits of a company for an accounting period consist of the aggregate of—
(a) the company’s BLAGAB profits for the period, and
(b) profits of the company chargeable under Case VI of Schedule D under section 436A of the Taxes Act 1988 (gross roll-up business) for the period.”
(5) Omit—
(a) section 89(1B) of FA 1989,
(b) in section 210A(10)(a) of TCGA 1992, “(within the meaning of section 89(1B) of the Finance Act 1989)”,
(c) paragraph 21(2) of Schedule 8 to FA 1995,
(d) paragraph 2(1) of Schedule 11, and paragraph 56 of Schedule 14, to FA 1996,
(e) paragraph 6(1) of Schedule 33 to FA 2003,
(f) in paragraph 9(2) of Schedule 7 to FA 2004, paragraphs (a) to (c) and the words from”; and, in consequence of” to the end, and
(g) paragraphs 58 and 67(2) of Schedule 7, and paragraphs 15(3) and 16(2) of Schedule 8, to FA 2007.
(6) The amendments made by this paragraph have effect in relation to accounting periods beginning on or after 1 January 2008.’.—[Kitty Ussher.]

Kitty Ussher: I beg to move amendment No. 108, in schedule 17, page 249, line 11, at end insert—

‘Group relief: gross profits to exclude relevant profits
18A (1) In section 434A of ICTA (computation of losses and limitation on relief), insert at the end—
“(4) For the purposes of section 403, where the surrendering company is an insurance company which is charged to tax under the I minus E basis in respect of its life assurance business for the surrender period, the company’s gross profits of that period do not include its relevant profits (within the meaning of section 88 of the Finance Act 1989) for that period; and expressions used in this subsection and section 403 have the same meaning here as there.”
(2) The amendment made by sub-paragraph (1) has effect in relation to accounting periods beginning on or after 1 January 2008.’.
Government amendment No. 108 arises at the urging of a small representative body. Its representations were made after the Bill was published, but we saw merit in them. I shall give some background.
Since 1915, life insurance companies have been able to set the expenses of management of their long-term insurance business against the income and gains of that business. That type of management expense is governed by insurance-specific rules under section 76 of the Income and Corporation Taxes Act 1988. In addition, under the Finance Act 2004 a life insurance company that has any income in its so-called shareholders fund—assets outside its long-term insurance fund—can set certain expenses against that income under the general management expenses rules. If those general expenses exceed a company’s profits, the excess can be relieved against the profits of other group companies. That is known as group relief. However, for life insurance companies, the income and gains of the long-term insurance business are taken into account in computing the excess despite the fact that those general expenses cannot be set against those life insurance profits.
The Government accept representations from the life insurance industry that that is unfair. The amendment therefore provides that the life insurance profits are not taken into account in working out whether there is an excess of the general management expenses available for group relief.

Amendment agreed to.

Amendment made: No. 109, in schedule 17, page 249, leave out lines 21 to 25.—[Kitty Ussher.]

Kitty Ussher: I beg to move amendment No. 110, in schedule 17, page 249, line 35, at end insert—
‘(2A) In paragraph 17 (restriction on losses carried forward), omit—
(a) in sub-paragraph (3)(b), “or (13)”, “and charges on income” and “and charges”, and
(b) in sub-paragraph (4), “or (13)”.’.

Jimmy Hood: With this it will be convenient to discuss Government amendments No. 111, 112, 114 and 115.

Kitty Ussher: Taken together, the amendments are additional tidying up measures dealing with the provisions on relief for remediation of contaminated land as modified for life insurance companies. They also make tidying up changes in advance of the first Bill of the tax law rewrite project on corporation tax. They also correct—God forbid—an error in the Finance Act 2007 (Schedule 9) Order 2008, which needs to be sorted. I could talk about each amendment in great and lengthy detail, but I will not do so unless the Committee specifically asks me to.

Mark Hoban: Perhaps it might help and reduce the amount of great and lengthy detail if I ask the Minister to clarify the question of remediation of contaminated land as modified for life insurance companies; I am not entirely sure that I understand where it fits. I also wonder why the Government did not made it explicit in amendment No. 112 that tax relief for R and D does not apply to insurance companies.

Kitty Ussher: Amendment No. 110 deals with relief for the remediation of contaminated land. It is a minor amendment, so I shall explain it.
Paragraph 21 of schedule 17 makes a number of amendments to schedule 22 to the Finance Act 2001, which is on relief for the remediation of land, in order to remove obsolete and incorrect references to other tax rules. However, I am shocked and horrified to have to say that the need to make such amendments to paragraph 17 of schedule 22 to the 2001 Act was overlooked. Amendment No. 110 corrects that oversight by removing references to section 76(13) of the Income and Corporation Taxes Act 1988 and the obsolete concept of “charges on income”.
I hope that I have answered the hon. Gentleman’s first question. I ask him to repeat his second question.

Mark Hoban: My second question was about amendment No. 112, which implies that an imaginative tax planner might think of some way in which an insurance company could seek tax relief for expenditure on research and development. I think that the amendments make it clear that they cannot. I am intrigued as to how the insurance industry might have been able to exploit the relief.

Kitty Ussher: I will write to the hon. Gentleman on that point. I am advised that life companies can get research and development relief under the large company scheme, but I shall write to him about the precise genesis.

Amendment agreed to.

Amendments made: No. 111, in schedule 17, page 252, line 5, at end insert—

‘Repeal of section 737D of ICTA
32A (1) In ICTA, omit section 737D (power to provide that manufactured payments are to be treated as income eligible for relief under section 438).
(2) In consequence of subsection (1), omit—
(a) section 83(1) of FA 1995,
(b) section 139(6) of FA 2006, and
(c) paragraph 175 of Schedule 1 to ITA 2007.’.
No. 112, in schedule 17, page 252, line 5, at end insert—

‘R&D relief
32B In paragraph 12 of Schedule 12 to FA 2002 (insurance companies treated as large companies), for the words following paragraph (b) substitute “the company does not qualify as a small or medium-sized enterprise for the purposes of Parts 1 to 3 of this Schedule or Schedule 20 to the Finance Act 2000.”’.—[Kitty Ussher.]

Kitty Ussher: I beg to move amendment No. 113, in schedule 17, page 252, line 5, at end insert—

‘Section 89(7) of FA 1989
32C (1) In section 89(7) of FA 1989 (policy holders’ share of profits), for “in respect of losses in accordance with section 85A(4)” substitute “in accordance with section 85A(4) in respect of losses incurred in an accounting period in which 31 December 2002 is included or any later accounting period.”
(2) The amendment made by this paragraph has effect in relation to accounting periods beginning on or after 1 January 2008 and ending on or after 15 May 2008.’.
The amendment corrects an erroneous repeal made by the Finance Act 2007 and restores the position that only losses originating in an insurance company’s period containing 31 December 2002 and any subsequent accounting periods can be carried forward for the purposes of section 89(7) of the Finance Act 1989.

Mark Hoban: I want to raise a concern about the amendment. The Minister says that it deals with an erroneous repeal in last year’s Bill, but representations that I have received suggest that the repeal in last year’s Bill was actually correct and the repeal this year is erroneous. That sounds a very complicated position to be in.
The amendment relates to a case that has been before the special commissioners in which it was ruled that the position in law as it was after last year’s repeal was correct, and that the life company could carry forward losses for periods ending before 31 December 2002. That relief is available to all other corporation tax payers.
With the amendment, we appear to have a question of policy rather than the simple undoing of an accidental repeal. On that basis, there is concern that it should have been subject to the normal level of consultation and scrutiny rather than simply being treated as a correction of an accidental repeal.
The case involves an insurance company, and the special commissioners found in favour of the insurer. I understand that the decision is subject to an appeal in the High Court later this year.
The amendment goes slightly beyond correcting an accidental repeal to a policy decision and actually overrides the decision reached by the special commissioners. In the light of current litigation, I wonder whether there should be some proper consultation between the Treasury, Her Majesty’s Revenue and Customs and the industry as to what the position should be.

Colin Breed: I rise to support the hon. Gentleman. I believe that we have all had a helpful e-mail from PricewaterhouseCoopers, and I was somewhat surprised that the Government had continued to pursue the amendment. It seems that at the very least there needs to be some clarification and discussion with the industry as to exactly what it does.
It is not simply a matter of repealing an accidental repeal; it is a matter of fundamental policy. If we allowed the amendment, we would lose the possibility of a discussion on that and of the Government’s taking account of the appeal that is going through. I hope that the Committee resists the amendment because there is clear evidence that the Government need to look at the matter further. Bearing it in mind that the amendment will repeal a measure that they accidentally repealed last time, it would be double jeopardy if they repealed a measure that should not have been repealed in the first place.

Stewart Hosie: What will be the implication if the judges find against the commissioners? Will the Treasury have to introduce emergency legislation to undo the erroneous repeal from last year? Given that the case is ongoing, that is a real possibility. If the commissioners are proved wrong and last year’s repeal was in fact not erroneous, will the Treasury be forced into emergency changes later? Would it not be better on that basis to wait until the court case has been held?

Kitty Ussher: The hon. Member for Fareham implied that there was some kind of intention behind what we did last year, but that is simply not the case.

Mark Hoban: I wish to clarify that. The intention to which the Financial Secretary referred is in this year’s repeal, not the problem that arose last year. Last year, according to the judgment of the special commissioner, the Finance Act 2007 was right. I am concerned that, actually, the amendment is a poor decision.

Kitty Ussher: I understood the hon. Gentleman, but he is not correct. It has been suggested that we are now reneging on an intended policy change. The point is that there was no hint in last year’s Budget of a package of proposed measures with costs attached to it that actually came into being.
If we had intended to make a policy change last year, it would have cost more than £50 million. We made the change, but it was unintentional, which is why we are seeking to correct it. The explanatory notes to last year’s Bill did not suggest that we intended that cost, which goes to show that we are now simply trying to get to the position as we thought it was last year. This is not a desirable position to be in, but I want to make it absolutely clear—

Stewart Hosie: The Minister referred to the measure in last year’s Budget, the Finance Bill and the explanatory notes. Given that the Finance Bill made the repeal, is the Government and Treasury position now that if a measure is not in the Budget, and if it repeals the Finance Bill, they can decide that it was not a good idea and revert the Budget and repeal the Finance Bill?

Kitty Ussher: I am not making any such point. I am simply saying that we made a mistake last year that had an unanticipated cost. Had it been deliberate, the cost would have been part of the explanatory notes and the Budget process. Some companies have benefited as a result, but we are not proposing to take the money back off them. We are simply proposing to go back to the situation that we thought we were in last year.

Peter Bone: Will the Minister clarify what the Exchequer has lost because of the error? Is it £50 million?

Kitty Ussher: The figure of £50 million would be correct if we did not make the correction today. I am advised that if we make the amendment, the overall cost is negligible. The cost would be £50 million if we did not correct the mistake and if hon. Members do not support us.
I am aware of the note that PricewaterhouseCoopers circulated to us and I should like to explain our response. The PWC briefing says that it is perfectly proper for accidental repeals to be corrected, which is what we are doing, and, rightly, that HMRC will no doubt argue that reintroducing paragraph 7(3) is merely putting the law back to the position it was in prior to the accidental repeal.
We are, of course, arguing that, but it is not just HMRC that is doing so. That is the Government’s clear position. The Government’s policy in 2003, in 2007 and today is that the relief for losses carried forward must be restricted. It is wrong to say, as the briefing does say, that the accidental repeal was, nevertheless, correct. The accidental repeal went against the decision of the special commissioners. I hope that that lays the matter to rest.

Mark Hoban: I am not sure that it does. We emerge from this slightly more confused than when we started. It would appear from the note that PWC sent us that the position as it stood in the Finance Act 2007 reflected the law, as the special commissioners found to be the case. We have some case law here that is very clear that companies should have been able to carry forward losses that arose prior to 31 December 2002. The special commissioners have been very clear in their finding about the availability of these losses. To say that this is merely the reversal of an accidental repeal last year does not really address the concern that the special commissioners have ruled on this and it is likely to go further.
There is a policy decision in that if the special commissioners’ findings were accepted by higher courts, there would be a loss to the Exchequer of £50 million. We are looking for a bit more openness and clarity as to why we should support the amendment. While the mistake may have been accidental last year, the reality is that the law as it stands reflects the view of the special commissioners in this case. Unless the Minister can give us some more reassurance, we may have to press this to a Division.

Kitty Ussher: I can give the explanation that the hon. Gentleman requested. It may help the Committee to bear it in mind that there were two parts to the commissioners’ verdict. They found that relief for losses was implicit in the pre-2003 rules, but they also said that the 2002 restrictions and later losses were still valid. So the commissioners’ verdict affecting the 2003 change is in line with putting back the restrictions. Perhaps that resolves the confusion.

Mark Hoban: I am troubled by this. Something that has been presented to the Committee as a reversal of an accidental repeal seems to be a bit more fundamental than that, given the special commissioners’ case. I am also conscious that this has been drawn to the Committee’s notice at quite a late stage in our proceedings. I and other hon. Members probably got this yesterday evening. Personally, I am minded not to oppose the amendment, but I would like to continue to explore this with a view to tabling further amendments on Report.

Amendment agreed to.

Amendments made: No. 114, in schedule 17, page 252, leave out lines 6 to 8 and insert—

‘Commencement of Schedule 9 to FA 2007
33 (1) Paragraph 17 of Schedule 9 to FA 2007 (transfers: commencement) is amended as follows.
(2) In sub-paragraph (2), for “9, 10(3) to (5),” substitute “10(5),”.
(3) In sub-paragraph (3)—’.
No. 115, in schedule 17, page 252, line 14, at end insert—
‘(4) After sub-paragraph (4) insert—
“(4A) The amendment made by paragraph 9 has effect in relation to contracts entered into in a period of account beginning on or after 1 January 2008.”
(5) Insert at the end—
“(6) The amendments made by paragraph 10(3) and (4) have effect in relation to assets transferred on or after 1 January 2008.”’.
No. 116, in schedule 17, page 252, line 29, at end insert—

‘Repeal of spent provision
36 In section 88(5) of FA 1989 (policy holders’ share of profits), omit the words after “January 1990”.’.—[Kitty Ussher.]

Schedule 17, as amended, agreed to.

Clause 41 ordered to stand part of the Bill.

Schedule 18

Friendly societies

Kitty Ussher: I beg to move amendment No. 117, in schedule 18, page 253, line 39, after ‘above,’ insert
‘or not so exempt by virtue of subsection (3) above,’.

Jimmy Hood: With this it will be convenient to discuss Government amendment No. 118.

Kitty Ussher: Government amendments Nos. 117 and 118 strengthen and revise the regulation-making powers governing the allocation of income gains, losses and expenses between taxable and tax-exempt businesses of friendly societies, so that those powers cover all circumstances in which an apportionment is required. Friendly societies are entitled to exemption from corporation tax on profits arising from life or endowment business and on profits from other business. Those exemptions are subject to statutory limits. Business written outside of those limits is taxable. To compute the taxable profits of a friendly society, it is necessary to apportion income gains, losses and expenses between taxable and tax-exempt business.

Mark Hoban: I would be grateful if the Minister clarified for the Committee which products offered by friendly societies are taxable.

Kitty Ussher: I am coming to that. Under current law, a friendly society may have taxable or tax-exempt other business, but not both. However, schedule 18 allows the transfer of other business between friendly societies without its impacting on the taxable or tax-exempt status of a transferred business. That means that it will become possible for a friendly society to have both taxable or tax-exempt other business.
Currently, there are no rules to divide income gains, losses or expenses between taxable or tax-exempt other business. Schedule 18 includes a regulation-making power to allow those rules to be made. However, the HMRC solicitor drawing up the regulations to do this has advised that the regulation-making power is insufficient to cover all situations. Therefore, Government amendment No. 117 strengthens the regulation-making power included in schedule 18, and Government amendment No. 118 extends the existing regulation-making power in section 463 of the Income and Corporation Taxes Act 1988, so that all situations are now covered.
The hon. Gentleman asked for examples of taxable or tax-exempt business. Sickness policies are an example of taxable business.

Amendment agreed to.

Amendment made: No. 118, in schedule 18, page 254, line 4, at end insert—

‘Extension of section 463
3A In subsection (1) of section 463 (application of Corporation Tax Acts to life or endowment business carried on by friendly societies), for “the life or endowment” substitute “long-term”; and, accordingly, in the title of that section, for “Life or endowment” substitute “Long-term”.’.—[Kitty Ussher.]

Schedule 18, as amended, agreed to.

Clause 42

Homes outside UK owned through company etc

Question proposed, that the clause stand part of the Bill.

David Gauke: Clause 42 relates to property abroad held by a company and to the tax consequences resulting from that. A requirement for a UK resident to hold a property abroad through a company is not uncommon, or it is, at least, to their advantage. For example, in Bulgaria it is necessary for all properties to be owned either by Bulgarian nationals or by a Bulgarian company. In France there are certain advantages to holding property through a company because of inheritance rules and in the US it is advisable to hold it through a limited liability company because of legal liability. Therefore, it is a common circumstance.
For some time, the problem has been that in those circumstances any income from that property, if it is rented out, would be treated as a benefit in kind. The Treasury has been trying to address that issue for some time. The difficulty has been distinguishing between domestic arrangements and employee benefits, which is the problem that we have here. We therefore welcome and support the objective of clause 42, but I have some detailed questions for the Economic Secretary.
The wording in the clause, and particularly in new section 100A of the Income Tax (Earnings and Pensions) Act 2003, relates to a property owned by a company—I think that the previous draft referred to “body corporate”. I understand that it has been changed to “company” to ensure that French sociÃ(c)tÃ(c)s civiles immobiliÃ¨res and US limited liability companies are included in the exemption, and I would be grateful for confirmation of that. Under new section 100A(1)(a), all the shares of the company have to be held by individuals. That begs the question, why not trusts? Trusts are a common manner in which property is held. The traditional objection to trusts is that they can be used as an anti-avoidance mechanism. I acknowledge that, but new section 100B(4) would appear to prevent that difficulty from arising, because it excludes from the regime an arrangement of which one of the main purposes is the avoidance of tax or national insurance contributions. Therefore, is there a good reason why a trust should not be able to hold shares in the relevant company? It also excludes a local management company, perhaps acting as a nominee. There is doubt as to whether a local management company as nominee for an individual would be able to hold shares in the company. Again, we would be grateful if the Economic Secretary could clarify that.
Another potential difficulty is that new section 100A(1)(a) refers to the fact that the director and the shareholder, or the property owner, will be the same person. It might be that the director of the company will be one spouse and the owner of the shares the other. That would appear to be excluded from the wording in new section 100A(1)(a).
Turning to new section 100A(2), the conditions on the company owning the property include that the property must be the company’s main or only asset. That is usually interpreted as more than 50 per cent. of the company’s assets, but it does not necessarily need to be more than that. Professional advisers have raised the point that the company may hold cash to secure borrowing, or have an overseas bank account which is used for running costs and/or to receive rent. So clarification as to what “main or only asset” means in that context would be helpful. Would the activities set out in new section 100A(2)(c) exclude activities relating to the management of minor assets? Can the Economic Secretary clarify the intention here?
The structure proposed by new section 100A(3) would appear to allow for a holding company on top of the company that owns the property, but that holding company has to be owned by the individuals in question. It has to own all of the company that holds the property. Professional advisers—the Institute of Chartered Accountants, I think—have asked what happens if two sets of friends own a property through two holding companies. Why deny the relief in such circumstances? It would seem to be possible to structure in such a way that that problem disappears, but is there any particular reason why such restrictions on a holding company are in place?
Proposed new section 100A(4) relates to the relevant interest in the property and states that it must be
“a right to exclusive possession of the property at all times and at certain times.”
Just for clarification, I would be grateful if the Minister could confirm that that does not cause a problem if the property is rented out, particularly with a timeshare arrangement, when the owners would have exclusive possession only at particular times, which would fall within the definition of “certain times”? Would that fall within the regime as set out in clause 42?
Finally, given that the issue is of long standing and has taken some time to be resolved, I understand that the position of HMRC is that it will not pursue tax liabilities in certain circumstances. The criteria are as follows: the property is owned by a company owned by individuals; the company’s only activities are ones incidental to its ownership of the property; the property is the company’s only or main asset; and the company is not funded directly or indirectly by a connected company. Again, will the Minister confirm that that is the policy approach of HMRC in such circumstances, while we wait for the terms of clause 42 to come into effect?

Kitty Ussher: As the hon. Gentleman said, clause 42 will ensure that individuals who have used their own money to buy—or who will buy—a home abroad through a company will not face a benefit in kind tax charge for any private use of the property. Some UK-resident individuals have set up or acquired companies to own a property abroad, generally for holiday use. They will often have done so on the advice of their professional advisers, because of the specific laws in the country where the property is located. The hon. Gentleman mentioned Bulgaria. If those resident individuals direct the company’s affairs, they could be within the scope of the living accommodation benefit in kind tax charge, although they may not have been aware of that. They may have considered that no tax charge arose in such circumstances and have not therefore reported the matter to HM Revenue and Customs.
The measure before us will remove that benefit in kind tax charge if certain qualifying conditions are satisfied. It will apply where an overseas property is owned by a company that is owned by individuals and the sole activity of which is holding that property for occupation and/or letting. That will include ownership through foreign companies, such as French SCIs, as the hon. Member for South-West Hertfordshire mentioned. The measure will have retrospective effect. It is right that we should remove the tax charge that would otherwise arise in those circumstances. It is not fair that those who have decided to buy a property abroad, out of their own taxed income, should face a bill simply because they did so through a company.
The hon. Gentleman asked a number of specific questions. A general point is that eligibility will be considered against the rules that have been laid out—we expect those rules to be clear, but we may need to look at the specifics of a specific situation in order to be able to judge, so I do not want to give any misleading impression today. I can respond in some general ways.
The hon. Gentleman asked whether companies owned by a trust were covered by the exemption. The exemption will not apply where the property-holding companies are owned by a trust. The limited exemption is intended to remove the benefits tax charge in certain circumstances—where an individual had incurred the charge without realising it. The Government feel that the current qualifying criteria strike the right balance in that regard.
The hon. Gentleman asked about a situation in which management companies are nominees. The legislation covers the situation in which the company owning the property is held by another company, and that can include a management company if it is within that definition. He also mentioned a situation in which property is rented out. If the property is rented out and the owner makes a profit, it will be treated as any other rental income. Obviously, if an individual has difficulty with a specific situation, they should contact HMRC and look at how that situation relates to general policy. The hon. Gentleman mentioned timeshare. I have already explained what would happen if property was rented out and the same applies to timeshare, so there is no issue there.
If two friends buy a property, the exemption applies regardless of whether the property is owned by a single person or with someone else. The legislation applies where the accommodation is provided to a director or their spouse, and the fact that both spouses own shares in the company will not affect whether they are covered by the exemption. The legislation includes only a benefit that arises from the owner’s private use—running costs for the rental of the property would be allowable as usual. I think that I have answered all of the hon. Gentleman’s questions.

Peter Bone: I should declare an interest because we sell overseas property. The Minister did not speak about the incidental element of the question. Often, the company will have a bank account in a foreign country. There may be a substantial amount of money in it because the owner will bring across money, depending on the exchange rate. That might fall foul of the incidental provision.

Kitty Ussher: I will have to write to the hon. Gentleman. I am sure that he will use my letter to make whatever appropriate domestic arrangements he sees fit.

David Gauke: I am grateful to the Minister for providing clarification on a number of points, but I would like to return to the trust issue. As I said earlier, if a company’s shares are held via a trust, I do not think that it will benefit. The question remains why not? I was concerned about a situation in which all the shares are owned by one spouse, although the other spouse is the director of the relevant company. Would that situation be protected? Although I have those concerns, on the whole we welcome the clause.

Question put and agreed to.

Clause 42 ordered to stand part of the Bill.

Clause 43

In-work and return to work credits and payments

Question proposed, That the clause stand part of the Bill.

David Gauke: The clause relates to the tax treatment of in-work credit, return-to-work credit, in-work emergency discretion funds, and emergency fund payments. A pilot scheme was rolled out nationally, and although that pilot scheme benefited from being exempt from income tax, that would not be the case for the national scheme but for this clause. How wide were the pilot schemes, what percentage of the country was covered by them, and when will the national schemes be introduced?

Kitty Ussher: As the hon. Gentleman said, clause 43 exempts in-work credit, return-to-work credit, the in-work emergency fund and the in-work emergency discretion fund from income tax. Such schemes are designed to encourage lone parents and incapacity benefit claimants to take up, and stay in, employment. The income tax exemption will apply to payments made on or after 6 April. In-work credit and return-to-work credit are weekly in-work payments for up to a year, to help the transition into work for lone parents and people with a disability or health condition. Lone parents in work can also receive discretionary payments from the in-work emergency discretion fund in Great Britain, and the in-work emergency fund in Northern Ireland, to help overcome unexpected financial barriers to work. The income tax exemption will ensure that payments under the scheme provide a clear, simple and transparent boost to income, ensuring the greatest possible impact on work incentives.
The hon. Gentleman asked about the effects of the pilots. The scheme was piloted as part of the pathways to work programme, which was piloted in 21 Jobcentre Plus districts. We announced in January 2006 in the welfare reform Green Paper that pathways to work would be rolled out nationally by April this year and we believe it will lift around 9,500 children out of poverty each year.

Question put and agreed to.

Clause 43 ordered to stand part of the Bill.

Clause 44

Company cars: lower threshold for CO2 emissions figure

Question proposed, That the clause stand part of the Bill.

Justine Greening: It is a pleasure to serve under your chairmanship, Mr. Hood. I have one brief question on the clause. I understand what the clause seeks to achieve, but I want to ask about the new tax regime for qualifying low CO2 emission cars, which has been introduced from April this year. From that date, cars with CO2 emissions of under 120g/kg are subject to an appropriate percentage of 10 per cent., which will be increased by 3 per cent. if the car has a diesel engine.
What assessment has the Treasury made of the number of cars that are likely to take advantage of that tax regime over the next three years? What amount of tax giveaway will be provided as part of that regime, to encourage those who have company cars, and companies that have company cars as a taxable benefit, to choose qualifying low CO2 emission cars, rather than going for the more traditional company car models that people have chosen in the past? That is the main question that I wanted to ask, to obtain more information about the qualifying low CO2 emission cars, and I would be grateful for any light that the Minister can shed on the Treasury’s expectations of how the scheme will work.

Angela Eagle: As the hon. Lady will know, the whole approach to company car taxation since it was reformed in 2002 has been to base it on carbon emissions, which encourages the take-up and development of more fuel-efficient cars in company fleets.
The clause promotes more environmentally efficient business travel and the take-up of cleaner cars because it will reduce the lower threshold from 135g/kg to 130g/kg of emissions. The lower threshold rate relates to an appropriate percentage of 15 per cent., which will have the effect of reducing each of the 21 company car tax bands by 5g/kg. The new rules will apply from 6 April 2010.
In terms of the 120g/kg category at the very low end, about which the hon. Member for Putney asked, we anticipate that over 100 different cars in the next three years would qualify on those emissions bases. This is set within the context of the forthcoming EU regulatory requirements, which will ratchet down the emissions that are allowable under EU law. We believe that manufacturers are already responding to the challenge of populating that area of the company car tax threshold rate, and the hon. Lady should also bear in mind the fact that fleet car sales are about half of all new car sales per year. It is therefore particularly important to send these messages to manufacturers who are aiming at the fleet car market. It is a very influential market—half of all new car sales—and it presents a way of achieving quite a rapid turnover and an improvement in CO2 emissions from new cars on the road.

Justine Greening: I wish to ask a brief question for clarity. When the Minister talked about 100 different cars, did she mean 100 different models or 100 different versions within models? I fully accept her point about signalling to encourage new cars acquired through company car schemes to be more environmentally friendly, and we welcome the fact that the Government have set out, three years in advance, their plans for company car taxation. That will encourage people who perhaps have had company cars for three or four years to make those choices.

Angela Eagle: I meant 100 different types of car. Clearly, there are now increasing signals and incentives for manufacturers to populate that part of the car taxation rate—they and companies are rewarded financially. In fact, everyone will gain, if we manage to make emissions savings that way. I hope that with that clarification, the hon. Lady will support clause 44.

Question agreed to.

Clause 44 ordered to stand part of the Bill.

Clause 45

Van fuel benefit

Question proposed, That the clause stand part of the Bill.

Colin Breed: I have no intention of opposing the clause, as its fairness is obvious. I just wanted to point out the unintended consequences that might be visited on hon. Members. We are seeing an explosion of vans on housing estates, which is causing havoc, because they cannot go into garages or, very often, on to driveways, so they end up on the road. A significant number of people now use their company and, indeed, local authority vans. I do not know what is happening elsewhere, but it is certainly a major problem in my part of the world.

Angela Eagle: The clause clarifies the tax and national insurance contribution treatment of van fuel, and it mirrors, for van fuel benefit, the signposts in the relevant legislation for company car fuel benefit. I am not sure quite how directly that impacts on the number of vans—white or otherwise—in the hon. Gentleman’s constituency. Does he wish to ban them?

Colin Breed: I am saying that company cars are much easier to cope with, but company vans are certainly not easy to cope with.

Angela Eagle: The hon. Gentleman has expressed an opinion and put it on the record—I shall leave it to his van-driving constituents to express theirs. I hope that the Committee will allow clause 45 to stand part of the Bill.

Question agreed to.

Clause 45 ordered to stand part of the Bill.

Clauses 46 to 47 ordered to stand part of the Bill.

Clause 48

Armed forces: the Council Tax Relief

Question proposed, That the clause stand part of the Bill.

David Gauke: Clause 48 exempts from tax payments to certain members of Her Majesty’s forces under the Ministry of Defence new armed forces council tax relief scheme. The Opposition welcome attempts to assist our armed services. I think that the Committee will not disagree that our armed services do a fantastic job for this country and, indeed, for the rest of the world. It is right that they should be treated well. Today is not the time to debate at greater length the military covenant and the relationship between the Government and the armed forces. The armed forces council tax relief scheme is an attempt to cover a certain amount of lost ground for the Government, but it is welcome none the less. It is quite right that it should be exempt from tax.
I want, however, to make one or two points. Paragraph 4 of the explanatory notes to the clause states:
“Following an announcement by the Secretary of State for Defence on 25 October 2007, payments under the Ministry of Defence’s new Armed Forces Council Tax Relief scheme are due to start from 1 April 2008.”
I checked that and there is an inaccuracy. The announcement was made on 25 September, not 25 October. I am sure that that is an entirely innocent mistake, but the context of the original announcement on 25 September was the Labour party conference in Bournemouth. The speech was made by the Secretary of State for Defence in what was believed to be a pre-election conference. How long ago that seems.
One or two points in that announcement attracted some criticism. First, the original proposal related only to members of the armed forces serving in Iraq and Afghanistan. On 28 January, the scheme was extended to include other places in the world such as the Balkans. It also appeared that the scheme was to be funded entirely from the existing MOD budget. Although it provided a happy announcement for the Government at their party conference, it was going to be funded by cuts elsewhere in the MOD budget.
The proposal in September was somewhat hurried. Will the Minister explain when the Treasury first became aware that it might result in a tax liability for members of the armed forces? The measures before us were proposed to ensure that the council tax relief scheme would be exempt from tax payments. Will the Minister also clarify the position for national insurance contributions? Again, the explanatory notes state:
“Secondary legislation will introduce a parallel disregard for National Insurance Contributions purposes.”
Clearly, under the clause, the council tax relief scheme will be exempt for income tax purposes from April 2008. From the passage of the National Insurance Contributions Bill earlier this year, my understanding of national insurance contributions is that they are determined by a forward-looking process. It is therefore necessary to pass secondary legislation for the next year. I may well be wrong on this, but will the Minister confirm that the disregard for national insurance contributions will not start until April 2009, so there will be an additional national contributions liability for members of the armed services benefiting from the armed forces council tax relief scheme?

Jane Kennedy: First, it is a pleasure to be in Committee this afternoon under your chairmanship, Mr. Hood. I have enjoyed listening to the discussions.
I do not believe that the national insurance effect will take exactly the form that the hon. Member for South-West Hertfordshire suggested. I will make a few general comments. I understand from my advice that the announcement was made in October, but I will double-check in the light of what he said.

David Gauke: I have among my notes the report from the BBC’s website, which gives the date as 25 September.

Jane Kennedy: I apologise. I acknowledge that it was September when my right hon. Friend the Secretary of State for Defence announced the introduction of the new scheme of tax-free council tax relief for members of the armed forces who are deployed on operations overseas. I do not want to go into the history, but it is clear that from 1 October 2007, the areas that attract operational allowance, namely Afghanistan and Iraq, will give rise to council tax relief, but from 1 February, service in other operational zones has been specified—that is, as I understand it, overseas operations, including British Forces South Atlantic Islands, Bahrain, Bosnia, Diego Garcia, Kosovo, Kuwait, Oman, Qatar, and deployed Royal Navy ships in receipt of the overseas deployment welfare package, and UN operations. The Ministry of Defence has the power to amend the specified areas from time to time.
The NICs changes will take effect from April this year, and secondary legislation was introduced with that effect to ensure that the relief is disregarded for NICs. I do not agree with the hon. Gentleman’s description of the reasons why the proposal was introduced. We have a compact with the British Army, and certainly British soldiers whom I meet from my constituency acknowledge the genuine commitment that the Government have made to British armed forces. They believe to some degree that we do not receive fair acknowledgement for our work to ensure that our armed forces are supported in every way.
The payment of the council tax relief and what we are discussing today are important steps to ensure that our armed forces receive council tax relief as intended. Many of them endure danger in difficult circumstances, and we believe that the relief should not be taxed, thereby ensuring that they receive the maximum benefit. The clause will cover all payments of council tax relief to the armed forces from April this year, and I hope that the clause will stand part of the Bill.

David Gauke: I am grateful for that clarification, although I stand by my point that the matter has been hurried. The Minister did not confirm the time at which the Treasury was first aware of council tax relief being potentially taxable, but none the less we welcome the clause.

Question put and agreed to.

Clause 48 ordered to stand part of the Bill.

Bob Blizzard: Before I move the motion to adjourn, may I point out that we are in the third week of this Committee? When we came into this room, the clock was five minutes ahead of the time on the monitor. I understand that we are using the time on the monitor, but it is confusing to have two time references in the same room, and I wonder whether I could look to you, Mr. Hood, to ensure that the clock is put right before we meet again.

Jimmy Hood: Before I put the Question on the motion to adjourn, may I say that I noticed that and mentioned it to the Clerk this morning?
Further consideration adjourned.—[Bob Blizzard.]

Adjourned accordingly at sixteen minutes to Seven o’clock till Thursday 22 May at Nine o’clock.